Monthly Forecaster: November 2004 Residential Furniture Industry Report From BDO Seidman

Furniture World Magazine

Monthly Forecaster: November 2004 Residential Furniture Indusstry Report From BDO Seidman. New Orders. According to our latest survey of residential furniture manufacturers, new orders fell 3 percent in September 2004 compared to September 2003. New orders were up 3 percent compared to August 2004. The September 2003 orders were 6 percent higher than September 2002. Year-to-date, new orders were 8 percent higher than 2003 results. Last month, the year-to-date orders were up 10 percent compared to last year. For the month of September 2004 compared to September 2003, 40 percent of the participants reported an increase in orders, while 60 percent reported a decline. Year-to-date, 65 percent of the participants have reported increases in orders. Shipments and Backlogs. Shipments for September were 4 percent higher than September 2003 and 6 percent higher than August 2004. Year-to-date, shipments were 6 percent higher than last year. Year-to-date 2003 results were 3 percent below 2002 results. Some 60 percent of the participants reported increased shipments year-to-date versus 57 percent last month. With shipments higher than new orders for the month of September, backlogs fell 8 percent from August levels. Compared to last September, backlogs were up 6 percent. In August, backlogs were 11 percent over the previous August. Receivables and Inventories. Receivables increased 2 percent over September 2003 and were 5 percent higher than August 2004. The 2 percent increase in receivables in September compares favorably with the 4 percent increase in shipments and the 6 percent increase in year-to-date shipments. Inventories were 12 percent higher in September 2004 than in September 2003. Inventories were 2 percent lower than August 2004 levels, the first month-to-month decrease in a few months. Last month, inventories were 10 percent higher than August 2003. Inventories should continue to be watched. With orders now up 8 percent and inventories up 12 percent, inventory levels may be getting a little high. Factory Employees and Payrolls. The number of factory employees declined 2 percent in September compared to August 2004. The number of employees also declined 2 percent compared to September 2004. These results were consistent with the August-to-August comparison of a 2 percent decline. Factory payrolls rose 7 percent in September compared to September 2003. Payrolls decreased 2 percent compared to August 2004. Year-to-date factory payrolls increased 5 percent, consistent with the August results. With orders up 8 percent and shipments up 6 percent, payrolls appear to be in line, especially when considering the effects of imports. In fact, based on some we have talked to, factory payrolls may still be too high for the amount of domestic production. National: The Conference Board announced that the U.S. leading index decreased 0.3 in October, the fifth consecutive monthly decline. The coincident index increased 0.3 percent and the lagging index increased 0.2 percent in October. The report indicated that the weakness in recent months has become more widespread. Even so, the report indicated that the recent declines in the leading index have not been large enough nor have they persisted long enough to signal an end to the current expansion. Three of the ten indicators that make up the leading index increased in October. Those included average weekly claims for unemployment insurance (inverted), manufacturers' new orders for consumer goods and materials and stock prices. The negative contributors-beginning with the largest-were index of consumer expectations, real money supply, interest rate spread, vendor performance, average weekly manufacturing hours, building permits, and manufacturers' new orders for nondefense capital goods. The index now stands at 115.1. During the six months ended October, the index has dropped 0.7 percent. All four coincident indicators increased in October with the largest contributor being employees on non-agricultural payrolls, followed by industrial production. The lagging index increased with four of the components advancing, led by commercial and industrial loans outstanding. Gross Domestic Product (GDP) : The advance reports for the GDP indicate an increase of 3.7 percent in the third quarter of 2004. This follows an increase of 3.3 percent in the second quarter. The major contributors to the increase in the GDP in the third quarter were personal consumption expenditures, equipment and software, exports, government spending and residential fixed investment. These were offset somewhat with a negative contribution from private inventory investment and an increase in imports-a subtraction in the calculation of GDP. Consumer Confidence: The Conference Board's Consumer Confidence Index fell to 92.8 in October, down from 96.7 in September. The Expectations Index fell to 92.0 from 97.7 and the Present Situation Index fell to 94.2 from 95.3. These declines followed a 1.9 percent decline in September. Lynn Franco, Director of the Conference Board's Consumer Research Center said, “Subdued expectations, as opposed to eroding present-day conditions, were the major cause behind October's decline in consumer confidence. And while consumers' assessment of the labor market this month showed a moderate improvement, the gain was not sufficient to ease concerns about job growth in the months ahead.” Consumers' outlook for the next six months were somewhat more negative. Those anticipating conditions to worsen increased to 10.3 percent from 9.4 percent. Consumers expecting business conditions to improve decreased to 20.6 percent from 21.6 percent. The Index of Consumer Sentiment from the University of Michigan's Survey of Consumers also reported a decrease in confidence. The Index of Consumer Sentiment fell to 91.7 in October, down from 94.2 in September and 95.9 in August. The Expectations Index fell to 83.8 in October from 88.0 in September. The report indicated that consumers continue to worry about long-term job growth in spite of recent gains in employment over the last few months. Housing: Sales of existing single-family homes held steady in October, setting a pace that was the fourth highest on record, according to the National Association of Realtors (NAR). Existing home sales slipped to 6.75 million units (seasonally adjusted) from 6.76 million in September. October's activity was 5.6 percent above the 6.39 million unit pace in October 2003. David Lereah, NAR's chief economist, said that home sales continue to exceed expectations. Lereah said, “The ongoing stimulus of lower-than-expected mortgage rates was the primary driver of strong home sales in October. Of course all of the other market fundamentals remain sound, so we should only see a modest decline from record home sales this year if mortgage rates gradually rise.” The national median existing-home price was $187,000 in October, up 8.8 percent over October 2003 median. Sales of new one-family houses in October 2004 were at a seasonally adjusted rate of 1,226,000, according to estimates of the U.S. Census Bureau. October's estimate was 0.2 percent above the revised September rate of 1,224,000 and 7.4 percent above the October 2003 estimate. The median sales price of new houses sold was $221,800 with an average selling price of $286,700. Single-family housing starts were at a rate of 1,645,000 or 5.7 percent above September 2004 estimates of 1,556,000. Housing remains one of the key components for our economy. While expected to ease somewhat over the next few months, the results continue to be near record pace and are substantially higher than the rates of a few years ago that were considered very good for furniture sales. Employment: Non-farm payroll employment increased by 337,000 in October according to the Bureau of Labor Statistics. The unemployment rate rose slightly to 5.5 percent from 5.4 percent in September. Construction employment rose sharply during October and several service-providing industries also added jobs. Both the number of unemployed persons, 8.1 million, and the unemployment rate, 5.5 percent, were essentially unchanged from September to October. The jobless rate has held steady most of the year and is substantially better than its most recent high of 6.3 percent in June 2003. Retail Sales and Consumer Prices: The Census Bureau of the Department of Commerce released advance estimates of U.S. retail and food services for October, adjusted for seasonal variation and holiday and trading-day differences, indicating sales of $342.1 billion, an increase of 0.2 percent over September and up 7.6 percent from October 2003. Total sales for the quarter ended October 2004 were up 6.7 percent over the same period a year ago. Retail trade sales were up 0.1 percent from September and were 7.6 percent above last year. Gasoline station sales were up 23.8 percent over October 2003 and sales of non-store retailers were up 14.1 percent over last year. Sales at furniture and home furnishings stores were up 0.3 percent over September-adjusted. October sales were 3.6 percent above last year on an adjusted basis. For the ten months ended October 2004, sales were up 6.9 percent over the first ten months of 2003. The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in October, before seasonal adjustment. The October level of 190.9 was 3.2 percent higher than in October 2003. On a seasonally adjusted basis, the CPI-U increased 0.6 percent in October following a 0.2 percent rise in September. Energy costs, which had declined in each of the preceding three months after increasing sharply in the first half of the year, increased 4.2 percent in October, accounting for half of the increase in the overall CPI-U. The index for food increased 0.6 percent in October after being unchanged in September. Most of this increase was in an increase in fruits and vegetables. The index for all items less food and energy increased 0.2 percent following a 0.3 percent increase in September. For the first ten months, the CPI-U rose at a 3.9 percent seasonally adjusted rate. This compares to an increase of 1.9 percent for all of 2003. Excluding food and energy, the CPI-U increased at a 2.4 percent seasonally adjusted rate in the first ten months of 2004 after increasing 1.1 percent in 2003. Durable Goods Orders and Factory Shipments: New orders for manufactured durable goods increased $0.4 billion or 0.2 percent in September. Computers and electronic products had the largest increase due to defense communication equipment. Year-to-date, new orders for manufactured durable goods increased 12.1 percent through September. New orders for furniture and related products were up 5.0 percent in September over September 2003. Year-to-date, new orders for these products were up 8.7 percent. Shipments of manufactured durable goods were down in September, following three consecutive increases. Shipments decreased 1.2 percent. Computers and electronic products had the largest decrease followed by transportation equipment. Year-to-date, shipments were up 10.9 percent. Shipments of furniture and related products were up 5.4 percent over September 2003. Year-to-date, shipments of these products were up 7.7 percent over 2003. Early reports for October indicate a slight decrease in durable goods orders, but an increase in shipments. Summary: While the results for September were not that encouraging, they were somewhat in line with expectations. Several of the manufacturers we spoke with had indicated that September results were not that strong. Recent conversations seem to indicate that business has improved in October and November. Unfortunately, as we have reported over most of this year, business for residential manufacturers is not good for everyone. We continue to believe that shipments will increase in the 5 to 6 percent range for the year with a little slower growth next year. We really need to see some improvement in consumer confidence, but we are not sure when that will happen. About BDO Seidman: BDO Seidman, LLP is a national professional services firm providing assurance, tax, financial advisory and consulting services to private and publicly traded businesses. For more than 90 years, the company has provided quality service and leadership through the active involvement of our most experienced and committed professionals. BDO Seidman serves clients through more than 35 offices and 250 independent alliance firm locations nationwide. Their Furniture Industry Services practice publishes Furniture Insights®. For more information go to http://www.bdo.com.